Regulatory Issues in the New NAFTA

The chapter on "Good Regulatory Practices" (Chapter 28) was concluded early on in the NAFTA renegotiations, but until last week there were a lot of unanswered question as to what it would include. On first read, it appears that this chapter goes beyond anything we've seen so far in similar chapters found in the CPTPP (Chapter 25) and CETA (Chapter 21). Below I provide a few highlights and some initial thoughts. I expect to do a more detailed analysis in the coming weeks.

To start, the scope of the chapter seems very similar to the CPTPP, which similarly reads:

2. Accordingly, this Chapter sets forth specific obligations with respect to good regulatory practices, including practices relating to the planning, design, issuance, implementation, and review of the Parties’ respective regulations.

The CPTPP includes a provision encouraging the creation of an OIRA-like body to coordinate regulatory policy (Article 25.4):

1. The Parties recognise that regulatory coherence can be facilitated through domestic mechanisms that increase interagency consultation and coordination associated with processes for developing regulatory measures. Accordingly, each Party shall endeavour to ensure that it has processes or mechanisms to facilitate the effective interagency coordination and review of proposed covered regulatory measures. Each Party should consider establishing and maintaining a national or central coordinating body for this purpose.

There is similar language in the USMCA (Article 28.3), with a slight tweak:

The Parties intend to maintain their respective central regulatory coordinating bodies, within their respective mandates and consistent with their law.

This is an expected adjustment, as the CPTPP regulatory coherence chapter was largely aimed at developing countries with relatively underdeveloped regulatory regimes.

Some expanded and new items, however, are worth noting. For instance, there are a set of provisions on transparency that address some long-standing issues for the United States, which it has tried to address not only in its FTAs, but also at the WTO. For example:

Article 28.5: Information Quality

Each Party recognizes the need for regulations to be based upon information that is reliable and of high quality. To that end, each Party should adopt or maintain publicly available guidance or mechanisms that encourage its regulatory authorities when developing a regulation to:

(a) seek the best, reasonably obtainable information, including scientific, technical, economic, or other information relevant to the regulation it is developing

(b) rely on information that is appropriate for the context in which it is used; and

(c) identify sources of information in a transparent manner, as well as any significant assumptions and limitations.

And there are also provisions that resemble an "early warning system" for new regulation, so that the Parties have enough time to provide feedback on proposed measures:

Article 28.6: Early Planning

Each Party shall publish annually a list of regulations that it reasonably expects within the following 12 months to adopt or propose to adopt. Each regulation identified in the list should be accompanied by:

(a) a concise description of the planned regulation;

(b) a point of contact for a knowledgeable person in the regulatory authority responsible for the regulation; and

(c) an indication, if known, of sectors to be affected and whether there is any expected significant effect on international trade or investment.

Entries in the list should also include, to the extent available, time tables for subsequent actions, including those providing opportunities for public comment under Article 28.9.

Throughout the chapter there is an emphasis on science-based risk assessment, and no mention of the word "precautionary" in any form (the same is true for the SPS chapter). On early planning, it is worth pointing out this is a process that is already covered by WTO notification requirements, but, to my knowledge, members do not tend to go into great detail about about the sectors affected by proposed measures (though they do often list products covered) and do not provide analysis of the expected impact on trade. These are issues that usually are raised later by the countries affected by a proposed measure in the TBT and SPS committees.

Other transparency provisions, such as Article 28.9 (Transparent Development of Regulation) seem generally similar to what's in the CPTPP. These provisions focus on impact assessment, providing a rationale for the measure, and an explanation of the data used in the impact assessment.

There is also mention of regulatory cooperation initiatives that are more similar to the CETA in their expansive coverage than the CPTPP. For instance, Article 28.17 provides:

3. The Parties recognize that a broad range of mechanisms including those set forth in the WTO Agreement, exists to help minimize unnecessary regulatory differences and facilitate trade or investment, while contributing to each Party’s ability to meet its public policy objectives. These activities may include, as appropriate to the particular circumstances:

(a) early stage formal or informal exchange of technical or scientific information or data, including coordinating research agendas, to reduce duplicative research;(b) exploring possible common approaches to the evaluation and mitigation of risks or hazards, including those potentially posed by the use of emerging technologies;(c) wherever appropriate, regulating by specifying performance requirements rather than design characteristics, to promote innovation and facilitate trade;(d) seeking to collaborate in relevant international fora;(e) exchanging information, such as of technical or practical nature, on regulations that each Party is developing to maximize the opportunity for common approaches;(f) co-funding of research in support of regulations and implementation tools of joint interest;(g) facilitating the greater use of relevant international standards, guides, and recommendations as the basis for regulations, testing, and approval procedures;(h) when developing or implementing regulations, considering relevant scientific or technical guidance documents developed through international collaborative initiatives;(i) considering common approaches to the display of product or consumer information;(j) considering the development of compatible platforms or formats for industry submission of product information for regulatory review;(k) coordinating in the implementation of regulations and sharing compliance information, including, as appropriate by entering into confidentiality agreements; and(l) periodically exchanging information, as appropriate, concerning any planned or ongoing post-implementation review or evaluation of regulations in effect affecting trade or investment.

Now, it's not entirely clear to what extent this replaces the current regulatory cooperation initiatives already in place, mainly the Canada-U.S. Regulatory Cooperation Council (RCC). The U.S. and Canada signed an MOU in June this year recommitting themselves to the work of the RCC, so it is entirely possible that the RCC will continue in parallel, but only to address bilateral regulatory issues between the U.S. and Canada. The U.S.-Mexico High Level Regulatory Cooperation Council (HLRCC) has been far less successful than its Canada-U.S. counterpart (both were founded in 2011), so the inclusion of regulatory cooperation in the new NAFTA may be a way to bring Mexico back in to the fold, and allow for trilateral cooperation where possible. That is a good thing. At the end of the day, however, the extent to which regulatory cooperation initiatives will be pursued is entirely up to the parties, and the hortatory language used in these provisions supports this conclusion.

Finally, the item that really piqued my interest is a provision that makes the chapter subject to dispute settlement:

Article 28.20: Application of Dispute Settlement

1. Recognizing that a mutually acceptable solution can often be found outside recourse to dispute settlement, a Party shall exercise its judgement as to whether recourse to dispute settlement under Chapter 31 (Dispute Settlement) would be fruitful.

2. Chapter 31 (Dispute Settlement) shall apply with respect to a responding Party as of one year after the date of entry into force of this Agreement for that Party.

3. No Party shall have recourse for dispute settlement under Chapter 31 (Dispute Settlement) for a matter arising under this Chapter except to address a sustained and recurring course of action or inaction that is inconsistent with a provision of this Chapter.

This is surprising for a few reasons. First, in the CPTPP, Article 25.11 states that the Parties do not have recourse to dispute settlement "for any matter arising under" the regulatory coherence chapter. Given the mixed levels of development among the CPTPP parties, along with the fact that the provisions in the regulatory coherence chapter generally focused on procedural aspects of domestic regulatory reform as opposed to cooperation, it was not surprising that the chapter would not be subject to dispute settlement. What is interesting is that the U.S. departed from the CPTPP model of regulatory coherence, and has instead built something that incorporates some aspects of the CPTPP, but also relies heavily on learned experience from the U.S.-Canada RCC process. Second, this is also a departure from Canada's obligations in CETA, which does not include a provision on dispute settlement at all in its regulatory cooperation chapter, but does emphasize that "The Parties may undertake regulatory cooperation activities on a voluntary basis." The inclusion of the word voluntary, which does not appear anywhere in the Good Regulatory Practices chapter of the USMCA is also a notable difference.

But before we get all worked up about the potential disputes that may be filed in the coming years, I also want to highlight another little nugget in Annex 28-A, which states:

The following entities are not a regulatory authorities for the purposes of this Chapter:

(a) for Canada: the Governor in Council; and

(b) for the United States: the President.

Leaving aside the fact that enforcing some of the regulatory process requirements, such as scientific risk assessment, early notification, and trade impact analysis will be difficult under any circumstances, I find it curious that the entities listed above were specifically carved out of the chapter. Let's say the President of the United States decides to take some regulatory action that does not comport with the procedural and other notification requirements of this chapter, say by enacting a trade restrictive regulation overnight, then that is not subject to dispute under this chapter. I suppose we will still need to rely on the WTO to deal with these matters.

Overall, while the Good Regulatory Practices chapter is a novel innovation that builds upon long standing shared practices between Canada and the United States, it remains to be seen how it will function, and what, if any, outcomes it will produce to reduce the burden of regulatory barriers in North America.

Comments

Regulatory Issues in the New NAFTA

The chapter on "Good Regulatory Practices" (Chapter 28) was concluded early on in the NAFTA renegotiations, but until last week there were a lot of unanswered question as to what it would include. On first read, it appears that this chapter goes beyond anything we've seen so far in similar chapters found in the CPTPP (Chapter 25) and CETA (Chapter 21). Below I provide a few highlights and some initial thoughts. I expect to do a more detailed analysis in the coming weeks.

To start, the scope of the chapter seems very similar to the CPTPP, which similarly reads:

2. Accordingly, this Chapter sets forth specific obligations with respect to good regulatory practices, including practices relating to the planning, design, issuance, implementation, and review of the Parties’ respective regulations.

The CPTPP includes a provision encouraging the creation of an OIRA-like body to coordinate regulatory policy (Article 25.4):

1. The Parties recognise that regulatory coherence can be facilitated through domestic mechanisms that increase interagency consultation and coordination associated with processes for developing regulatory measures. Accordingly, each Party shall endeavour to ensure that it has processes or mechanisms to facilitate the effective interagency coordination and review of proposed covered regulatory measures. Each Party should consider establishing and maintaining a national or central coordinating body for this purpose.

There is similar language in the USMCA (Article 28.3), with a slight tweak:

The Parties intend to maintain their respective central regulatory coordinating bodies, within their respective mandates and consistent with their law.

This is an expected adjustment, as the CPTPP regulatory coherence chapter was largely aimed at developing countries with relatively underdeveloped regulatory regimes.

Some expanded and new items, however, are worth noting. For instance, there are a set of provisions on transparency that address some long-standing issues for the United States, which it has tried to address not only in its FTAs, but also at the WTO. For example:

Article 28.5: Information Quality

Each Party recognizes the need for regulations to be based upon information that is reliable and of high quality. To that end, each Party should adopt or maintain publicly available guidance or mechanisms that encourage its regulatory authorities when developing a regulation to:

(a) seek the best, reasonably obtainable information, including scientific, technical, economic, or other information relevant to the regulation it is developing

(b) rely on information that is appropriate for the context in which it is used; and

(c) identify sources of information in a transparent manner, as well as any significant assumptions and limitations.

And there are also provisions that resemble an "early warning system" for new regulation, so that the Parties have enough time to provide feedback on proposed measures:

Article 28.6: Early Planning

Each Party shall publish annually a list of regulations that it reasonably expects within the following 12 months to adopt or propose to adopt. Each regulation identified in the list should be accompanied by:

(a) a concise description of the planned regulation;

(b) a point of contact for a knowledgeable person in the regulatory authority responsible for the regulation; and

(c) an indication, if known, of sectors to be affected and whether there is any expected significant effect on international trade or investment.

Entries in the list should also include, to the extent available, time tables for subsequent actions, including those providing opportunities for public comment under Article 28.9.

Throughout the chapter there is an emphasis on science-based risk assessment, and no mention of the word "precautionary" in any form (the same is true for the SPS chapter). On early planning, it is worth pointing out this is a process that is already covered by WTO notification requirements, but, to my knowledge, members do not tend to go into great detail about about the sectors affected by proposed measures (though they do often list products covered) and do not provide analysis of the expected impact on trade. These are issues that usually are raised later by the countries affected by a proposed measure in the TBT and SPS committees.

Other transparency provisions, such as Article 28.9 (Transparent Development of Regulation) seem generally similar to what's in the CPTPP. These provisions focus on impact assessment, providing a rationale for the measure, and an explanation of the data used in the impact assessment.

There is also mention of regulatory cooperation initiatives that are more similar to the CETA in their expansive coverage than the CPTPP. For instance, Article 28.17 provides:

3. The Parties recognize that a broad range of mechanisms including those set forth in the WTO Agreement, exists to help minimize unnecessary regulatory differences and facilitate trade or investment, while contributing to each Party’s ability to meet its public policy objectives. These activities may include, as appropriate to the particular circumstances:

(a) early stage formal or informal exchange of technical or scientific information or data, including coordinating research agendas, to reduce duplicative research;(b) exploring possible common approaches to the evaluation and mitigation of risks or hazards, including those potentially posed by the use of emerging technologies;(c) wherever appropriate, regulating by specifying performance requirements rather than design characteristics, to promote innovation and facilitate trade;(d) seeking to collaborate in relevant international fora;(e) exchanging information, such as of technical or practical nature, on regulations that each Party is developing to maximize the opportunity for common approaches;(f) co-funding of research in support of regulations and implementation tools of joint interest;(g) facilitating the greater use of relevant international standards, guides, and recommendations as the basis for regulations, testing, and approval procedures;(h) when developing or implementing regulations, considering relevant scientific or technical guidance documents developed through international collaborative initiatives;(i) considering common approaches to the display of product or consumer information;(j) considering the development of compatible platforms or formats for industry submission of product information for regulatory review;(k) coordinating in the implementation of regulations and sharing compliance information, including, as appropriate by entering into confidentiality agreements; and(l) periodically exchanging information, as appropriate, concerning any planned or ongoing post-implementation review or evaluation of regulations in effect affecting trade or investment.

Now, it's not entirely clear to what extent this replaces the current regulatory cooperation initiatives already in place, mainly the Canada-U.S. Regulatory Cooperation Council (RCC). The U.S. and Canada signed an MOU in June this year recommitting themselves to the work of the RCC, so it is entirely possible that the RCC will continue in parallel, but only to address bilateral regulatory issues between the U.S. and Canada. The U.S.-Mexico High Level Regulatory Cooperation Council (HLRCC) has been far less successful than its Canada-U.S. counterpart (both were founded in 2011), so the inclusion of regulatory cooperation in the new NAFTA may be a way to bring Mexico back in to the fold, and allow for trilateral cooperation where possible. That is a good thing. At the end of the day, however, the extent to which regulatory cooperation initiatives will be pursued is entirely up to the parties, and the hortatory language used in these provisions supports this conclusion.

Finally, the item that really piqued my interest is a provision that makes the chapter subject to dispute settlement:

Article 28.20: Application of Dispute Settlement

1. Recognizing that a mutually acceptable solution can often be found outside recourse to dispute settlement, a Party shall exercise its judgement as to whether recourse to dispute settlement under Chapter 31 (Dispute Settlement) would be fruitful.

2. Chapter 31 (Dispute Settlement) shall apply with respect to a responding Party as of one year after the date of entry into force of this Agreement for that Party.

3. No Party shall have recourse for dispute settlement under Chapter 31 (Dispute Settlement) for a matter arising under this Chapter except to address a sustained and recurring course of action or inaction that is inconsistent with a provision of this Chapter.

This is surprising for a few reasons. First, in the CPTPP, Article 25.11 states that the Parties do not have recourse to dispute settlement "for any matter arising under" the regulatory coherence chapter. Given the mixed levels of development among the CPTPP parties, along with the fact that the provisions in the regulatory coherence chapter generally focused on procedural aspects of domestic regulatory reform as opposed to cooperation, it was not surprising that the chapter would not be subject to dispute settlement. What is interesting is that the U.S. departed from the CPTPP model of regulatory coherence, and has instead built something that incorporates some aspects of the CPTPP, but also relies heavily on learned experience from the U.S.-Canada RCC process. Second, this is also a departure from Canada's obligations in CETA, which does not include a provision on dispute settlement at all in its regulatory cooperation chapter, but does emphasize that "The Parties may undertake regulatory cooperation activities on a voluntary basis." The inclusion of the word voluntary, which does not appear anywhere in the Good Regulatory Practices chapter of the USMCA is also a notable difference.

But before we get all worked up about the potential disputes that may be filed in the coming years, I also want to highlight another little nugget in Annex 28-A, which states:

The following entities are not a regulatory authorities for the purposes of this Chapter:

(a) for Canada: the Governor in Council; and

(b) for the United States: the President.

Leaving aside the fact that enforcing some of the regulatory process requirements, such as scientific risk assessment, early notification, and trade impact analysis will be difficult under any circumstances, I find it curious that the entities listed above were specifically carved out of the chapter. Let's say the President of the United States decides to take some regulatory action that does not comport with the procedural and other notification requirements of this chapter, say by enacting a trade restrictive regulation overnight, then that is not subject to dispute under this chapter. I suppose we will still need to rely on the WTO to deal with these matters.

Overall, while the Good Regulatory Practices chapter is a novel innovation that builds upon long standing shared practices between Canada and the United States, it remains to be seen how it will function, and what, if any, outcomes it will produce to reduce the burden of regulatory barriers in North America.